Relationship with the Tobacco Industry

Helped BAT Rebrand as “A Responsible Company within A Controversial Industry”

In the late nineties, as the tobacco industry’s 40 year campaign to deny the health effects of tobacco was becoming no longer tenable due to successful litigation in the United States and the release of internal tobacco industry documents, KPMG assisted British American Tobacco (BAT) with its corporate social responsibility strategy. This involved KPMG helping BAT to rebrand itself as a “responsible company, within a controversial industry”.

One BAT document noted that "Agreed that as a result of our meeting, KPMG would have no problem in helping us with the CSR exercise”.[2]

Another document written by KPMG, titled BAT: The Project: The Way Forward, outlined how “BAT's over-riding objective is now to regain control of its own destiny by re-establishing dialogue with key stakeholder groups.[3] To do this, it must be seen to be a truly responsible global organisation, redefining itself from its present situation to the responsible company within a controversial industry.”

Although this slogan, “a responsible company within a controversial industry” has been consistently utilised since the turn of the century, KPMG noted that there were three core problems with trying to reposition BAT as being responsible, which have not changed since:[3]

Worked for BAT to Counter the World Health Organization

“In particular”, one KPMG document noted, “BAT wishes to lead the rest of the industry in repositioning tobacco manufacturers as socially responsible.”[4]

KPMG acknowledged the risks of this strategy: “BAT’s proposal is seen as a spoiling tactic, which backfires on BAT”, the firm warned.[4]

“Conflicting” Role in Tobacco Privatisation in Uzbekistan

A 2007 peer-reviewed paper[5] examining the privatisation of the tobacco industry in post-Soviet states, demonstrated that KPMG had a “potentially conflicting” role in the privatisation processes, by not only being appointed by the State Privatisation Agency (GKI) to advise on privatisation, but also lobbying for Philip Morris International (PMI) in the country.

KPMG's Illicit Tobacco Studies Used to Oppose Plain Packaging in the UK

Image 1. PMI Corporate Affairs Update, March 2012

Since 2005 KPMG has produced reports on the scale of the illicit trade in tobacco products in the European Union (EU) and in Australia which have been used in the media to argue against the introduction of plain packaging.[6][7][8]

Leaked PMI documents, describing the tobacco company’s 2012 strategy to prevent plain packaging in the UK, mentioned a KMPG report as part of a “workstream which included “submissions (including reports and studies)” (see Image 1).[9]

KPMG's illicit tobacco trade research has been severely criticised in both Australia and the UK (see below), with questions raised about its independence and whether the company effectively acted as a third party advocate for the tobacco industry.

“Project Star"

In 2004, PMI signed an Anti-Counterfeit and Anti-Contraband Cooperation Agreement with the European Commission.[10] As part of this agreement, PMI commissioned KPMG “to measure the size of the legal, contraband and counterfeit markets for tobacco products in each of the 25 EU Member States”. KPMG’s study of the illicit market was to be undertaken on an annual basis.

Initially KPMG’s remit was to produce an annual Powerpoint presentation[11], but by 2010 the research findings were written up in a report called “Project Star”, which was eventually published in 2011 after a European Freedom of Information Request, albeit with sections redacted.[12][13]

The PMI contract has been estimated to be worth £10 million, and is led by Robin Cartwright, who joined KPMG from the British security service MI5.[14]

Methodology and Data Criticised

In April 2013, PMI claimed that levels of illicit tobacco in the EU rose from 10.4% in 2011, to 11.1% in 2012, citing KPMG’s 2013 Project Star study as evidence.[15]

This was not an accurate reflection of the data according to the study's small print. The report warned that, due to a subtle change in methodology the 2012 data could not be accurately compared with the previous year’s data, and that this change would lead to an overestimate in 2012 compared to 2011.[16]

Academics, including University of Bath researchers, conducted a review of the 2010 Project Star report and compared the KPMG data to independent data.[13] They concluded that there was little information provided on the 'Project Star methodology used to produce the illicit estimates, and that Project Star underestimated legal cross-border sales by using interviews and what are termed Empty Pack Surveys (EPSs).

The paper outlined problems with EPSs, one of the main ways which KPMG analyses the extent of the illicit market:

EPSs cannot distinguish between foreign packets that have had duty paid and those which have not;

No details were provided about the timing of pack surveys (apart from in Germany). Tourist seasons would see more foreign packs and so this information would provide important context;

No methodological information was given to discern whether EPSs were conducted via a random selection of areas to ensure that the sample was representative of the population. No description was given of how areas were selected and only large cities were included and therefore non-urban areas were under-represented. For example, those who are more deprived are more likely to use illicit tobacco[17][18][19] and live in urban areas.[20][21]

Furthermore, there was inadequate external validation of the data, which was mostly validated by tobacco companies who arguably have a vested interest in overestimating the illicit trade.

Moreover, the report revealed that approximately 25% of the illicit trade market in Europe in 2010 was made up of genuine PMI brands. This is against the Illicit Trade Protocol, where tobacco companies are accountable for ensuring their supply chain is adequately controlled. PMI did not publish this data when presenting the findings of the 2010 report.[13]

In other words, far from showing the level of illicit trade in the UK to be rising, the figures suggested it was actually falling. This corroborated data from Her Majesty Revenue and Customs (HMRC) indicating that the illicit tobacco trade has actually been declining over time, although a small increase from 2011-12 to 2012-13 was noted in the estimated figures from 2012-13. The 2012-13 estimated figure for the UK was 9% which is the same as the 2010-11 figure.[22]

Cited in PMI Submission to 2012 Plain Packaging Consultation

To argue that illicit trade is a significant problem in the UK, PMI cited KPMG’s Project Star report in its submission to the 2012 UK Consultation on plain packaging stating:

“nearly 11 billion units of illicit tobacco products are consumed in the UK each year, equal to more than 10% of the total UK cigarette market…”[23][24]

PMI goes on to argue that plain packaging will make the current situation worse. For a counter argument go here:

When the British government announced that it was to consult on introducing plain packaging in 2011, dozens of industry-generated reports in the UK media argued that levels of illicit cigarettes were increasing rapidly, and that plain packaging would make the situation worse.[26] Also see:

Project Sun actually revised its estimate for the UK illicit trade downwards for 2013. The report stated that “alternative data sources suggest this [the 2012 estimate] may have overstated non-domestic incidence for the full year”. KPMG claimed that additional data which were not previously available to them “suggest there has been a more gradual decline from 2011 to 2013".[25]

Neither KPMG nor the tobacco companies made any attempt to correct the misleading stories in the British press in light of the new analysis.

KPMG's Australian Illicit Tobacco Data Strongly Criticised

KPMG has also produced bi-annual reports, commissioned by tobacco companies, to examine whether the introduction of plain packaging in Australia led to an increase in tobacco smuggling.[27]

The reports have been strongly criticised by the Australian government, academics and Sir Cyril Chantler (see below), the paediatrician who examined the health benefits of plain packaging for the UK government.

“Substantially exaggerates” size of illicit in Australia

In a damning critique of KPMG's research on illicit trade, the Australian Government published the following:[28]

“The tobacco industry‘s estimates of the size of the illicit market are not considered to be accurate. A KPMG report prepared for the tobacco industry (British American Tobacco Australia, Philip Morris Ltd and Imperial Tobacco Australia Ltd) and released on 4 November 2013, claims that during 2012-2013, consumption of illicit tobacco grew from 11.8 per cent to 13.3 per cent of total tobacco consumption in Australia. The report claims that this represents a loss of $1 billion in excise revenue.”

The government continued:

“Like previous illicit trade reports commissioned by the tobacco industry, the KPMG report appears to substantially exaggerate the size of the illicit tobacco market in Australia and the consequent loss of excise and duty revenue.”

The Government’s critic was in part based on analysis of KPMG’s methodology by Quit Victoria and the Cancer Council Victoria, who concluded that:

"In addition to the very real possibility of over-sampling of foreign packs, the proportion of foreign packs that are contraband is also likely to be overestimated due to KPMG substantial underestimation of legal non-domestic consumption. KPMG appears to have underestimated likely amounts brought into Australia both by Australian residents returning from overseas visits and by overseas students and other visitors. And it has neglected to include foreign packs brought in by individual travellers or mailed in excess of personal limits but on which customs duty has been paid. The total market for illicit tobacco in Australia is likely to be substantially smaller than is suggested in the KPMG report”.[29]

“I do not have confidence in KPMG’s assessment”

In his report on the health benefits of introducing plain packaging published by the British Government, Sir Cyril Chantler wrote:[30]

"Tobacco manufacturers cite the industry funded KPMG report on illicit tobacco in Australia, which purports to show that there has been a large increase in illicit trade since the introduction of plain packaging. I have considered both this report and a critique. My team have also met with KPMG in order to understand their methods".

Sir Chantler concluded that: “I do not have confidence in KPMG’s assessment of the size of – or changes in – the illicit market in Australia.”[30]

Other KPMG Research on Illicit Tobacco: Northern Africa, India and New Zealand

On 26 July 2017, KPMG released a report on illicit cigarette trade in the Maghreb region in Northern Africa, commissioned by PMI.[31] The report included additional qualitative analysis conducted by the Royal United Services Institute for Defence and Security Studies (RUSI) – an organisation that, like KPMG, was awarded funding from PMI IMPACT (a PMI research funding initiative) to conduct research on illicit trade and organised crime.[32]

On 12 October 2017, KPMG released a report in conjunction with the Federation of Indian Chambers of Commerce & Industry (FICCI) (an association of Indian business organisations), titled ‘Illicit trade: Fuelling terror financing and organised crime’.[33] As with many other KPMG reports, its findings were widely-publicised by media outlets.[34][35][36]

On 20 July 2018, KPMG released a report on illicit tobacco in New Zealand, commissioned by Imperial Tobacco NZ.[37] The report included data from a consumer survey carried out by Kantar New Zealand, commissioned by BAT NZ, Imperial Tobacco NZ and PMI. It estimated that 9.2% of total tobacco consumption in New Zealand was illicit.[38] Previous estimates from 2009 suggested illicit tobacco made up only 1.0 – 1.1% of total tobacco consumption in New Zealand.[39] The 2018 report was released approximately four months after New Zealand’s Ministry of Health announced a review of tobacco excise tax,[40] and was publicised throughout the national media.[41][42][43] Acting Prime Minister Winston Peters responded to the report by suggesting high tobacco excise tax was fuelling violent crime.[42][43]

Embroiled in South African Controversy

In December 2014, KPMG was commissioned by South African President Jacob Zuma to conduct an investigation into allegations that a covert unit with the South African Revenue Service (SARS) had spied on the President and other politically-connected figures.[44] Following revelations that many senior KPMG South Africa executives were involved with businesses linked to the Gupta family (who have strong ties with President Zuma[44]), on 15 September 2017, KPMG announced that it was withdrawing the findings and conclusions of its report on its’ SARS investigation.[45]

The KMPG report was described by some as a contribution toward ‘state capture’ of the SARS, with former finance minister Pravin Gordhman stating that:

“KPMG had no basis‚ except subservience to a malicious SARS management‚ to malign a number of individuals and facilitate the capture of a vital state institution."[46]

KPMG also came under scrutiny for serving as auditors for BAT, who were also featured in the SARS allegations.[44] The former UK public relations company Bell Pottinger was also implicated for its relationship to the Gupta family, ultimately leading to its administration. For more on this, see: Bell Pottinger.